Oct 3 Tending to a client's estate may seem like
a logical shift for a securities broker, especially after a
decades-long role as their trusted financial adviser. But the
move could lead to a slew of trouble for brokers, including the
wrath of regulators and getting fired.
There is good reason for concern. The Financial Industry
Regulatory Authority (FINRA), Wall Street's industry-funded
watchdog, issued disciplinary orders against 18 brokers this
year involving brokers who were named trustees, executors and
even beneficiaries by clients, according to a spokeswoman.
Most of the brokers were suspended and fined. Their public
records are now permanently branded with ugly disclosures about
The actual number of violations is likely to be much higher,
say securities lawyers, since such arrangements often do not
surface until after the client dies and estate beneficiaries or
surviving family members complain.
Major brokerage firms typically prohibit the practices
because, among other things, they can easily lead to conflicts
of interest. A trustee, for example, who also happens to be the
trust account's broker, could potentially make decisions based
on which commissions are more lucrative, instead of what is in
the trust's best interest.
Some brokerages, such as Bank of America Corp's
Merrill Lynch unit, make limited exceptions in cases in which
clients are immediate family members, a spokesman said. Brokers
who get in trouble with FINRA have typically ignored the rules
and failed to disclose estate-related activities with clients to
their firms, according to a review of disciplinary cases.
In one extreme example, a broker in Naples, Florida, was
fired in 2010 by Stifel, Nicolaus & Co Inc, a Missouri-based
brokerage, then censured last month by FINRA because of
trust-related activities. He failed to tell Stifel and a
previous firm for which he worked that five clients named him as
a trustee to oversee their trusts, and that some of them had
also named him as a beneficiary, according to regulatory
documents. None of the clients were family members, said FINRA.
On Sept. 25, FINRA suspended the broker, Robert Gesdorf, for
60 days and fined him $30,000 because of the conduct, according
to a settlement. Gesdorf - whom FINRA says inherited $1.7
million in 2009 along with his wife as co-beneficiaries for one
such trust - is now a broker at a Moors & Cabot branch in
Naples. He has neither admitted nor denied FINRA's allegations,
according to the settlement.
Gesdorf declined to comment, saying he had to speak with his
firm's compliance department. Officials from Stifel and Moors &
Cabot did not return calls seeking comment.
There are good reasons for prohibiting brokers from getting
entangled in clients' estates, said Lou Spadafora, a securities
lawyer in New York. The arrangements are often viewed as
self-dealing by brokers, who stand to rake in money from fees
they earn as trustees, commissions they earn from trading trust
accounts, or windfalls when clients die.
Brokers expose themselves and their firms to potential
lawsuits, alleging everything from engaging in self-dealing to
taking advantage of elderly customers. Brokers who act as
trustees, even with the best of intentions, could also face
legal consequences for not acting in the best interests of the
trusts or their beneficiaries, Spadafora said.
That would be on top of potential regulatory penalties from
Firms can also be on the hook for not properly supervising
brokers involved in clients' estates.
"It's a dangerous area to play in," Spadafora said. Brokers
who agree to such arrangements "are putting the crosshairs on
their own backs," he said.
It is not uncommon for clients to ask a longstanding
adviser to play a role in managing their estates, says Matthew
Farley, a New York-based lawyer who advises brokerages on
A decades-long relationship often extend beyond money
matters into family friendships and socializing, Farley said.
Often, their clients are elderly and alone.
Putting a trusted adviser in charge of an estate - and even
leaving the adviser a token gift - seem logical to those
clients, Farley said. But even the most well-intentioned and
honest arrangements can work to a broker's disadvantage, Farley
Brokers who genuinely want to serve or who are unable to
convince clients not to name them as beneficiaries should
disclose the situation to their firms and ask whether another
broker can take charge of the account, said Curtis Carlson, a
lawyer in Miami, who represents both investors and brokers.
"The broker should want to step aside," Carlson said. Even
then, firms that may be receptive to the arrangement should take
steps to ensure the client understands the decision, he said.
GOING TOO FAR
There are instances in which brokers cross the line, said
Carlson. Some brokers may convince elderly clients to name them
as trustees or beneficiaries in order to reap financial
benefits, he said.
While the FINRA action against Gesdorf, the broker in
Naples, Florida, does not shed light on his intentions, the
facts in the case have raised eyebrows among lawyers.
In all, Gesdorf failed to make 13 separate disclosures in
annual compliance questionnaires that he was named by five
different clients - some as old as 90 - for various roles in
their estates, including being an alternate trustee, according
"The fact that it was never disclosed was a pretty good
indication that it never passed the sniff test," said Carlson.
Gesdorf, who advised some of the clients for more than 20
years, told FINRA he was unaware that one client named him as an
alternate trustee, according to the settlement document.
Nonetheless, he did not disclose that he and his family also
received at least $30,300 in gifts from clients, FINRA said.
Gesdorf also stands to inherit $2 million from one client's
estate, in addition to other lucrative bequests, according to